You may recall that several weeks ago investment firm Goldman Sachs said buying the euro and short-selling the Aussie dollar was one of the best long-term trades out there.
The Wall Street Journal even reported at the time that someone at Goldman Sachs tagged it ‘the trade of the century‘.
Well, on the other side of the trade they might find the team from Citigroup.
The investment bank said the Aussie dollar is on track to hit a new all-time high against the US dollar in 2013. This article quoted Steve Englander, head of a foreign exchange division at Citi, on why he is bullish on the Australian currency.
What’s interesting about the position is there was barely any mention of the fundamentals of the Australian economy driving the value of the Aussie dollar.
It appears to be a pure play on the liquidity that the US Fed and other central banks are pumping into global markets.
Englander has a point. The Aussie dollar has held steady despite the drop in iron ore and coal prices — two of Australia’s biggest exports. This was highlighted last week when Whitehaven Coal [ASX: WHC] released its quarterly report. The report notes:
‘Export coal prices have fallen substantially over the last six months and, after rallying mildly in July/August, have fallen to new lows over the last few weeks…After allowing for approximately 8% NSW royalty and 3% exchange rate loss, the net revenue for spot thermal coal is currently at or below the FOB cash cost per tonne of many producers.’
A Higher Aussie Dollar
Will be Betting on a China Rebound
Will be Betting on a China Rebound
The team at Citi are betting on a recovery. Englander’s argument for the Aussie to go even higher and break through its previous record of US1.1081 is a rebound in China’s economic growth. This will drive commodity prices higher and the Aussie dollar with it.
That seems like a pretty big bet to us. Chinese data isn’t exactly setting the world on fire right now. So it’s open to a lot of debate. We know one thing for sure. Sound Money.Sound Investments editor Greg Canavan would beg to differ. You can read his latest white paper on the future of China here…
So who’s right, Goldman Sachs or Citigroup?
Well, it brings to mind what analyst Jim Rickards told Port Phillip Publishing subscribers at an exclusive briefing in August. For the moment, his thesis is holding: capital flows are dominating trade flows and that’s being expressed in the high Aussie dollar.
Australia is seen as a ‘safe haven’ currency for now by the market. And higher interest rates have attracted capital from the US, China and Europe.
This is the type of external pressure that US Federal Reserve chairman Ben Bernanke’s policy of cheap money is pushing on emerging markets. Mainly China and Brazil. But it’s affecting advanced economies like Switzerland, Japan and Australia too.
If you look at the chart below you can see that even the interest rate cuts in recent months haven’t really done much to take down the high flying Aussie dollar either:
It’s easy to forget that since the Aussie dollar floated in the early eighties, its average exchange rate is 72 US cents.
The high Aussie dollar might mean the Reserve bank of Australia (RBA) will come under pressure to weaken the Aussie.
Central Banks are Trying to Steer the Aussie Dollar Up and Down
Maybe it has already started. Yesterday came news that the RBA was trying to deflate the Aussie in a ‘passive’ way by accumulating foreign exchange reserves. The Age reported that the central bank has ‘accumulated $863 million in August and September, compared to the post-January 2010 pace of $54 million a month.’
For the moment the RBA is one of the few central banks not openly interfering in the currency market. The same can’t be said of the Bank of Japan, which probably isn’t going to help the RBA’s cause when it releases its latest intervention this week as part of its Asset Purchase Programme.
According to this Financial Times report, analysts have tagged it ‘QE9′ — which probably gives the Bearded One, Ben Bernanke, all sorts of ideas. ‘The meeting will probably end with another round of increased asset purchases, lifting the BoJ’s total purchase program from Y80 trillion to around Y90-95 trillion.‘
The Bank of Japan wants a weaker yen.
When a market no longer acts and reacts according to fundamentals, it’s pretty hard to plan for the future. Do you buy an asset because you like it, or do you buy it because you think central banks could manipulate it?
But whatever you decide, one thing is certain. We don’t know which way the Aussie dollar will go next. But what we do know is that investors who have their wealth valued in one currency (the Aussie dollar), are taking a big risk.
With the Aussie still trading near a record high, it makes sense to look at diversification options. Greg Canavan has written about that in some detail this year. If you haven’t checked out his thoughts already, it’s worth re-visiting it now.
Callum Newman
Co-Editor, Scoops Lane
From the Port Phillip Publishing Library
Special Report:
After the Bust
Daily Reckoning:
Australia’s Asian White Policy Economy
Money Morning:
QE3 Program Could Double, Will it Take Gold With it?
Pursuit of Happiness:
Don’t be a Scavenger, Juice Up Your Savings
